FTC Rule Bans Juicing Oil Markets

Every time the price of oil goes up there are complaints about price gouging and market manipulation. Yet, for years, try as hard as they have to catch some scoundrel at it, neither the FTC, CFTC, Congress, Justice Department or a bevy of prosecutors looking for a scalp have been able to prove that price movements are anything other than supply and demand reactions in the market.

But there is a new crew on the job at the Federal Trade Commission (FTC) and they voted 3-1 August 6, 2009 to adopt a rule prohibiting wholesale market manipulation in oil products including crude oil, gasoline, and petroleum distillates such as jet fuel, diesel, and fuel oils.

The new rule prohibits “fraudulent or deceptive conduct” that distorts wholesale petroleum markets, or misleads market participants. The trial bar will surely have a field day dragging traders before the bar of justice to be fleeced for some suspect transaction. The FTC has some serious sanctioning authority to impose up to $1 million per violation per day for violations.

The new rule goes into effect November 4, 2009 and “prohibits any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline or petroleum distillates at wholesale, from:

(a) knowingly engaging in any act, practice, or course of business – including making any untrue statement of material fact – that operates or would operate as a fraud or deceit upon any person; or

(b) intentionally failing to state a material fact that under the circumstances renders a statement made by such person misleading, provided that such omission distorts or is likely to distort market conditions for any such product.”

Before you cheer too much for this rule

Consider that the futures markets in petroleum products also help bring down the price of oil as well as drive it up when demand exceeds supply. I’m not saying that some unscrupulous traders have never engaged in fraudulent or misleading conduct—you’d have to be brain dead to believe that. But face it, don’t you think if this bad behavior was wide spread then the persistent search for someone to hang for spiking oil prices would have resulted in at least a few crooks found and punished?

Show biz and politics more than a serious market reform.

If we were serious about limiting suspected market manipulation we could much more effectively do it by requiring all but genuine brokers to have more ‘skin in the game’ of their trades and limit their ability to use margin calls to float their deals. We tend to be more cautious when it’s our own money at risk than when we go to Las Vegas with someone else’s credit card.

Besides, in times when credit is tight and risk aversion is high we need ruthlessly efficient mechanisms to clear the market and set transparent prices even if those prices are painful. That’s what commodity traders do. The alternative to trading risk is higher prices with that risk premium built into every transaction not just the peak period ones.